Fixed Income
There is some evidence of giant investment funds quietly switching out of government bonds, perhaps the most overpriced assets on the planet. Nobody wants to be caught flat-footed if the latest surge in the global money supply finally catches fire and sets off full-blown inflation. $6 trillion of government debt is trading at negative interest rates, led by the Swiss two-year bond at -1.046pc.The German two-year Bund is at -0.4pc.The Germans and Czechs are negative to six years, the Dutch to five, the French to four, the Irish to three. Bank of America says $17 trillion of bonds are trading at yields below 1pc.
Interest Rates
Such yields are remarkable given global core inflation has been rising since 2014 and is now at a seven-year high of 2.7pc (as measured by Hendersen Global Investor’s G7 and E7 composite index). In the Eurozone, money supply is soaring at a rate of 11.9pc. If the ECB ‘doubles down’ next week with more quantitative easing this will add ‘fuel to the money supply fire’. (The ECB might also cut the bank deposit rates it pays further into negative territory).The US Federal Reserve is expected to raise interest rates in December, the first rate rise since the financial crisis. Will this be the start of a series of rate rises over the next couple of years? We wil then find out whether the world can cope with public and private debt ratios hovering at all time highs of 265 pc of GDP for the OECD club and 185pc in emerging markets, up 35 percentage points since the pre-Lehman peak. That is a story for late-2016, at the earliest.
UK: Mark Carney,Governor of the Bank of England, states interest rates to remain low “for a considerable period of time” even though next move is likely to be up.
Equities
The main US S&P 500 index has fully recovered from the China fueled summer ‘sell-off’ and at 2,100 is approximately 2 per cent shy of its record close. Although the stock market is faced with an interest rate rise, not normally good news for stock investors, the latter view the move positively as it indicates the economy is strong and can withstand such a rate rise. UK and European stock markets remain well below Q2 highs on weaker growth fundamentals, especially in mainland Europe.
Foreign Exchange
The US dollar is inching towards its 12-year highs as investors continued to assess the outlook for global monetary policy i.e. the US being the only country to start rising interest rates imminently.
Commodities
Prices remain under pressure. Commodities, from metals to oil, have fallen more than 23 per cent this year, according to the Bloomberg Commodity Index which tracks 22 raw materials, amid increasing concern about slowing growth in China. That has been exacerbated by the prospect of interest rate increases by the Federal Reserve and a strengthening US dollar, which makes commodities priced in the currency more expensive. Both gold and copper hit six-year lows this week. Gold tends to move inversely to the dollar. Copper is suffering from weak demand from China, with the latter consuming more than 40 per cent of the world production of copper, predominately used in wiring. Oil continued to be weak on global supply fears with a ‘Venezuelan official saying oil could go to the ‘mid $20’s’ if OPEC does not act to tackle the global surplus. Goldman Sachs research also predicted there would be more pain for raw materials next year.
Corporate News
Global debt markets are on the cusp of an unwelcome development with the number of companies defaulting on their obligations set to reach the century mark in 2015, driven largely by US shale gas producers unable to cope with the slide in the price of oil /energy prices. The jump in defaults has been reflected in the average yield on US corporate junk bonds, rising from 5.6% at the start of 2014 to 8 per cent currently. The average yield in the energy and materials sector has shot above 12 per cent last week.
The hot M&A story is this week’s announcement of Pfizer’s $160 Billion take-over of Dublin based Allergan with the former attempting to slash its tax bill by moving overseas. The third largest announced deal in history, caps a frenzied year of mergers and acquisitions and brings the total value of global deals unveiled since the start of 2015 to more than $4.2 Trillion (this surpasses the previous record set in 2007, on the eve of the financial crisis). Pfizer stands to save at least $21 BN in future tax bills joining other brands that have fled overseas through “inversion”, such as Burger King and Liberty Global. Pfizer’s CFO stated the company’s new effective tax rate would be 17-18 per cent compared with 25.5% in 2014.This is Pfizer’s second attempt at a tax inversion after a failed bid for Anglo-Swedish AstraZeneca for £69 BN 18 months go. The current bid has understandably created an immediate backlash from senior politicians in the US who strongly believe the company should pay their fair share of US taxes.
Equities
S&P 500: 2100
Nasdaq: 5100
FTSE 100: 6300
Bonds – 10 Year Government Yields
US 2.25%
EU 0.55%
GB 1.90%
Foreign Exchange
EUR/USD 1.0620 (1 euro buys 1.0620 dollars)
GBP/USD 1.5100 (1 pound buys 1.5100 dollars)
Commodities
OIL: Brent: 44.00 (dollars per barrel)
GOLD: 1070 (dollars per ounce)
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Paul McCormick
